At Last, Endless Outflows From Muni Funds Finally Turn Positive

The hemorrhaging of cash from municipal bond mutual funds finally stopped in the week ended June 8.

After 29 straight weeks of outflows, there were net inflows of $274 million for muni bond funds that report their flows weekly, according to Lipper FMI. In addition, the Investment Company Institute reported inflows to muni bond funds of $20 million for the week of June 1, its most recent estimate.

Investors withdrew $436 million from muni funds in the previous week, Lipper data showed. But investors returned armed with more cash and less fear of the market to push muni bond fund flows into the black, industry veterans said.

“People recognized that a lot of the fears [of the market] were overblown, and all of a sudden munis were actually relatively cheap,” said Alexandra Lebenthal, founder and chief executive officer of Lebenthal & Co.

Significant municipal bond coupon payments and principal redemptions distributed this month also explain the improvement in muni bond fund flows, Chris Mauro, research analyst at RBC Capital Markets, wrote in a research note. The redemption proceeds were most likely reinvested quickly in muni bond funds, as well as in taxable and tax-exempt money market funds, which also showed positive inflows for the week, he added.

For all of 2009 and most of 2010, investors flocked to muni bond funds. But flows reversed in November.

The stream of outflows became a flood as negative headlines associated with the municipal market followed, including predictions of bond defaults. Investors in funds that report their flows weekly pulled more than $4 billion for the week ended Jan. 19, Lipper reported.

Assets for funds that report their flows weekly ticked up this week to almost $318 billion from just under $317 billion the previous week. The value of the holdings for weekly reporting funds climbed by $562 million. Last week, they reported a jump of $1.2 billion.

Among all municipal bond mutual funds that report their flows weekly, the four-week moving average dropped to a $141.5 million outflow from a $233.6 million outflow the week before.

ICI has reported scant inflows for four consecutive weeks. Last week, muni bond funds saw $18 million in inflows, according to ICI numbers.

ICI says its weekly cash flows are estimates that are based on reporting covering 95% of industry assets. For its methodology, Lipper says it surveys 1,577 mutual funds over a weekly period.

For reprint and licensing requests for this article, click here.
Buy side
MORE FROM BOND BUYER